Business External Environment Essay Example

  • Category:
    Business
  • Document type:
    Assignment
  • Level:
    College
  • Page:
    4
  • Words:
    2920

Introduction

Established in 1986 by Li Shufu, Geely is a multinational corporation which manufactures and sells automobiles to China and other countries such as Sweden and the United Kingdom. Initially, the company was a refrigerator manufacturer which targeted Chinese companies but this has since changed to include more products such automobiles, engines and motorcycles. Needless to say, it has not been an easy journey for Geely as it faces stiff competition from both local and international companies.

With the use of the right strategies such as acquisition and product differentiation, Geely has grown exponentially to acquire substantial market shares in its markets. However, there is always room for improvement and, therefore, this paper will analyse Geely using two models, Porter’s Five Forces and the PESTEL models, to evaluate the position and direction of the organization. Recommendations of the strategic options for Geely will be made and new vision and mission statements provided.

Porter’s Five Forces Model

The Porter’s Five Forces tool was developed by Michael Porter in 1980 and it has become an essential in understanding where a business lies (Porter, 2011). Organizations all over the world use this tool to evaluate their position in their respective industry as well as identify and make use of their strengths to gain a competitive advantage over rivals (Anton, 2015). According to Porter (2011), this model is made up of five forces which are the buyer power, the supplier power, competitive rivalry, threat of substitute and the threat of new entrants.

The Buyer Power

In a nutshell, the buyer power refers to the ability the customers have to control the price of a product (Magretta, 2013). The fewer customers a company has, the more their bargaining power and vice versa. This is because the organisation cannot afford to lose any customer to its competitors and it is thus compelled to comply with the demands of its customers (Yunna & Yisheng, 2014). Having a few powerful customers limits the growth of a company as it is always forced to negotiate the costs of its products with its customers. Geely Automobile has millions of target customers in and out of China. Additionally, the company has managed to gain an admirable number of loyal customers over the years due to the fact that it manufactures unique products at affordable prices. Geely uses the strategy of product differentiation to set it apart from its competitors. This has been a successful strategy for the company as it has managed to gain several domestic and international customers.

The Supplier Power

The bargaining power of suppliers is the second force in Porter’s Five Forces model. The power of suppliers refers to the ability of suppliers to affect the amount of profits made by a company (Anton, 2015). These comprised the suppliers of different components of production such as labor, both skilled and unskilled, raw materials and spare parts. If there are few suppliers in the market, the cost of switching suppliers is relatively high which compels a company to stick to one supplier. Consecutively, this gives more bargaining power to the suppliers which reduce the profits a company makes from the sale of its products.

The headquarters of Geely are in Hangzhou, Zheijiang in China and the larger part of its production facilities are located in China. Luckily, there is a high supplier of both skilled and unskilled labor in China which reduces the power of the labor suppliers in China. The China Association of Automobile Manufacture Research (2007), points out that there is a high supplier of designers, security personnel and other workers. This prompts suppliers to enhance the quality of their services as it is inexpensive for a company to change its suppliers. This works to the advantage of Geely Automobiles as it has a number of alternatives from which it can acquire the required supplies. The company is in partnership with some of the leading companies which are well-known for the quality of their goods. These include Volkswagen, General Motors and Nissan among others.

Rivalry from Competitors

The automobile industry is very competitive and Geely, therefore, faces competition from both domestic and international companies. Price, quality and the introduction of new products ae some of the factors which lead to an increase in competition. The profits made by a company are affected negatively by strong competition as companies have to scramble for market shares as well as engage in price wars (Porter & Heppelmann, 2014). Geely faces stiff competition from local Chinese companies such as Chery and BYD and also international corporations such as Toyota, the Range Rover and Mitsubishi (Chen & Zhou, 2013). Due to this cut-throat competition, Geely cannot afford to be complacent about the quality of the products it manufactures. The company ensures that its goods are of the highest level of quality to ensure that the needs and expectations of the customers are met satisfactorily. In addition to this, Geely also differentiates its products in different ways and offers mass customization on its products. The firm also carries extensive promotional campaigns for its products which contribute highly in raising the customers’ awareness of their existence.

Threat of substitutes

The threat of substitute is another force to consider when evaluating the position of a company. This is due to the fact that the threat of substitutes affects the bargaining power that companies possess. Simply defined, a substitute is something which can perform the same function as a product which is already in existence. Substitutes become a serious threat to companies especially when they have lower prices or higher quality than the already existing product. Geely faces the threat of being substituted with products from other companies such as the recently environmental friendly car that was recently launched by General Motors.

Threat of New Entrants

The automobile is a profitable industry and this being the case it is always attracting investors to venture into it. However, some factors such as the cost of entry and pre-existing laws limit new entrants (Magretta, 2013). Setting up an automobile company is quite expensive and this helps keep new entrants away as the expenditures involved are too high. In addition to this, some laws in China limit entry by foreign companies. For example, a foreign company which wishes to establish operations in China must get into a partnership with a local Chinese company. These factors limit the number of new entrants who establish operations in China. This works to the advantage of Geely Automobiles as it has less competitors to scramble for market shares with.

The Macro-environment Model

The macro-environment model, also referred to as the PESTEL framework, is sued to examine the external macro environmental for a business. Just like Porter’s Five Forces, this framework is an essential tool in determining the position of a business and identifying the external forces that affect it. The word PESTEL is an acronym and the letters denote Political, Economic, Social-cultural, Technological, Legal and Environmental factors which affect a business in one way or another. It is worth noting that since these factors are external, it is impossible for a business to control the way they affect it. This section of the paper will look at how Geely Automobile is affected by these external macro-environment factors.

Political Factors

External political environmental factors comprise of aspects that affect political stability. These include the taxes imposed by the government of goods, economic policies and trading agreements (Jurevicius, 2013). Some legal factors also intertwine with some legal laws such as international labor laws, consumer protection laws and merger policies. The automobile industry in china is boosted by the government incentives. Some of the measures which have been used by the Chinese government to boost the automobile industry include reduced taxes which boost the number of vehicles the companies sell. In addition to this, any foreign automobile entrant whom wishes to operate in China must get into a partnership with a local company. Geely, for example, has partnered with the London Taxi Brand to sell passenger cars. The existing laws also allow Geely to make international mergers and acquisition which further boosts its position as an international automobile company. Over the years, the company has acquired a number of firms such as Volvo cars. Such a stable political environment has enabled Geely to expand its operations as well as increase its visibility in the international market.

Economic Factors

External economic factors comprise elements such as economic growth rates, employment and unemployment levels, income levels, labor costs, energy and fuel costs as well as exchange, loan interest and inflation rates (Issa & Issa, 2014). All these elements affect a company in a manner that it cannot control. High rates of interest on loans, for instance, motivate consumers to save more and reduce on spending. Geely has most of its production facilities based in China. This serves as an added advantage for the company as there is ample supply of labor in China which helps reduce the cost of production for the organization.

Another economic factor that affects a business externally is the exchange rate. Major fluctuations in the exchange rate affect a firm negatively as it portrays a weakness in the currency (Dobbs, 2014). Luckily for Geely, the Chinese currency has been stable in the recent years with minimal changes which have strengthened it. The economic growth is also another major factor which affects a business. The economic growth of China is currently one of the fastest growing economies in the world and this is an added advantage to Geely. As a matter of fact, the recent economic boom experienced by China has made it possible for more consumers to reach the financial status necessary for one to own a car. This has boosted Geely’s sales and more sales have been projected in the coming years.

Socio-cultural Factors

There are a number of socio-cultural factors which influence a business. These include culture, trends and consumers’ access to products. Geely Automobile cannot afford to underestimate that socio-cultural factors have on consumers’ demand for products. There is an increasing desire by consumers to own vehicles and this increases the demand for the products manufactured by Geely (Chen & Zhou, 2013). In addition to this, by focusing on the social trends of its customers, Geely is in a position to respond to the needs of the target customers in a better way. Moreover, the organisation is able to respond to the needs of the customers to own high quality yet affordable vehicles.

Technological Factors

There is a rapid change in the technological field and companies are have no choice that to adapt to the changes. Those firms which do not adapt to technological changes are rendered obsolete (Rothaermel, 2016). Geely Automobile has been in the forefront at adapting to technological changes which is exhibited in a number of ways. These include the development of better and more efficient production facilities, the use of technology to diagnose problems in a product and also the ability of the customers to learn more about new and existing products on the company’s well-developed website.

Environmental Factors

Environmental factors such as the depletion of natural resources, recycling of materials and waste disposal also affect a business (Issa & Issa, 2014). A lot of consumers are now more attracted to buy products which are environmental-friendly. Geely Automobile has responded to this by developing energy-saving vehicles which have a low consumption of energy. In addition to this, the company also conserves non-renewable natural resources such as fuel by using natural lighting in its facilities instead of electricity energy. Moreover, Geely Automobiles is responsible about proper disposal of waste materials as well as recycling of raw materials. All these factors combined work to the advantage of the organisation.

Legal Factors

Legal factors comprise of the laws that a company have to adhere to. According to Jurevicius (2013), these include consumer laws, labor laws and environmental laws among others. Geely Automobiles has been an exemplary firm as it abides with all the laws of the land. Some companies in China are associated with unlawful practices such as child labor and poor treatment of workers but Geely has managed to steer clear of such unethical and unlawful practices. The company also abides to all environmental laws which save it a lot of resources which would otherwise be spent in settling unnecessary lawsuits from various bodies and activists.

Recommendations

Geely Automobile Company has experienced an admirable growth in the three decades it has been in existence. The company has grown from a refrigerator manufacturer to an international company specializing in the manufacture of vehicles, engines, motorcycles and transmissions. However, they are a number of strategic options which can steer the company to even greater heights if implemented.

The first recommendation is that the company should focus more on its internationalization and global expansion strategy. Although it is already in operation in a number of countries, Geely should focus on making entry into more markets. This strategy will work even better if the company focuses on developing markets which are unsaturated by similar products.

The second recommendation is for Geely to make use of acquisition corporate strategy. Acquisition has been proved to be a successful strategy for companies, especially those that wish to expand internationally. This is because acquiring an already existing company gives a company added benefits such as inheriting the existing customers, patents and intelligence (Hitt, Ireland, & Hoskisson, 2013). In addition to this, acquisition enables a company to gain a better understanding of the culture and consumer trends of the new markets. For instance, the culture of the Americans and that of the Chinese people vary greatly and acquiring an American company would assist Geely in market penetration.

The third recommendation involves making better use of technological innovations to not only improve its production but also to improve the customers’ experience. Geely can, for example, come up with a mobile application which enables consumers to order and follow the manufacture of their product.

Finally, Geely should spent more resources and research and development of new as well as the improvement of existing products. Consumer centricity is of utmost importance in this era where numerous companies are scrambling for customers (Fader, 2012). Being in a position to respond better to the needs, wants and trends of the consumers will give Geely a competitive advantage over its competitors. In addition to this, the organisation should also be willing to spend more on the strategy of product differentiation. Hitt, Ireland, & Hoskisson (2013) postulate that product differentiation enables a business to develop unique products which are different from similar products in the market. This can be in the form of color, texture, functionality or even packaging. Consumers are more attracted to purchase products which are unique than those that are similar to other products.

Following these recommendations, there is need for the company to adopt new mission and vision statements.

Mission statement: To be the leading automobile company in the world by providing affordable products without compromising on quality.

Vision statement: To become a market leader in the automobile industry and set a pace for other companies.

Conclusion

From the two analyses, it is clear that Geely Automobile Company is doing well in the market as an international automobile corporation. The growth experienced by the company in the three decades it has been in operation is commendable to say the least. Needless to say, this success did not just happen by chance but it was a result of hard work and the use of viable strategies. The automobile industry is very competitive and Geely can, therefore, not afford to be lenient but, rather, it needs to implement even more strategies to ensure its continued growth. These strategies include acquisitions, internalization and global expansion and product differentiation. If implemented successfully, these strategies will see the company steer to even greater success and achieve long-term sustainability.

References

Anton, R. (2015). An Integrated Strategy Framework (ISF) for Combining Porter’s 5-Forces, Diamond, PESTEL, and SWOT Analysis.

Chen, H., & Zhou, J. (2013). The Positioning Strategy of China Self-owned Car Brands in the Chinese Market.

Chen, F., & Kodono, Y. (2012, November). SWOT analysis and five competitive forces of Chery automobile company. In Soft Computing and Intelligent Systems (SCIS) and 13th International Symposium on Advanced Intelligent Systems (ISIS), 2012 Joint 6th International Conference on (pp. 1959-1962). IEEE.

E. Dobbs, M. (2014). Guidelines for applying Porter’s five forces framework: a set of industry analysis templates. Competitiveness Review, 24(1), 32-45.

Fader, P. (2012). Customer centricity: Focus on the right customers for strategic advantage. Wharton digital press.

Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2013). Strategic management: concepts and

cases: Competiveness and globalization (10thed.). Mason, OH: South-Western Cengage Learning

Issa, T., & Issa, T. (2014). Sustainable business strategies and PESTEL framework. GSTF Journal on Computing (JoC), 1(1).

Jurevicius, O. (2013). PEST & PESTEL Analysis,». Strategic Management Insight, 13, 2013.

Magretta, J., (2013). Understanding Michael Porter: The essential guide to competition and strategy. Harvard business press.

Porter, M. E. (2011). Competitive advantage of nations: creating and sustaining superior performance. Simon and Schuster.

Porter, M. E., & Heppelmann, J. E. (2014). How smart, connected products are transforming competition. Harvard Business Review, 92(11), 64-88.

Rothaermel, F. T. (2016). Competitive Advantage in Technology Intensive Industries. Technological Innovation: Generating Economic Results (2nd Edition)(Advances in the Study of Entrepreneurship, Innovation &amp, 26, 233-256.

Yunna, W., & Yisheng, Y. (2014). The competition situation analysis of shale gas industry in China: Applying Porter’s five forces and scenario model. Renewable and Sustainable Energy Reviews, 40, 798-805.